NEW DELHI: State-owned oil companies have vehemently denied that they are making huge profits and asserted that only the government subsidy helped them to report a net profit of less than 1% of their turnover in 2011-12. This profit is reported in order to maintain creditworthiness, the companies said in a joint statement on Sunday.
The assertion by the three companies — Indian Oil (IOC), Bharat Petroleum (BPCL) and Hindustan Petroleum (HPCL) — has come in the wake of a nationwide debate on whether they have overstated the under-recoveries from sale of fuels and if it was right on their part to expect the government to fully meet these when their other income streams allow them to make profits. This concern was also echoed by a Cabinet minister (Vayalar Ravi) who last week wrote to oil minister Jaipal Reddy, suggesting a closer look at the oil companies’ financials.
However, on Sunday, home minister P Chidambaram came in support of the oil firms. Describing the petrol price hike as ‘not acceptable but inevitable’, Chidambaram justified the recent increase saying the supply of petrol and diesel could be affected if oil companies did not increase the price in line with international crude rates.
Chidambaram pointed out that the average international price of a barrel of crude oil was now $120 per barrel, compared with $20 during the NDA regime, forcing the government to increase the price. He said the government was giving a subsidy of R31.49 per litre of kerosene, R17.64 per litre of diesel and R480 per LPG cylinder.
Ravihad said the government should take a hard look at the claims of oil companies about their losses. “Apparently, the claim made by oil companies that they are running at a loss seems to be untrue. As a matter of fact, the expenditure of oil companies, including salaries, is among the highest inIndiaand there is a perception that funds are being wasted,” the minister said.
Oil companies, however, countered the argument saying it is a false impression that they make huge profits. “On the contrary, the OMCs (oil marketing companies) have been incurring huge losses. The companies incurred losses due to sale of three products, namely diesel, domestic LPG and kerosene at highly subsidised prices,” they said.
The way oil companies compute their losses from selling fuel below cost has always been the subject of debate. Because of the regulated price as well as the fact that subsidy compensation is given only to state-owned companies, these blue-chip firms are protected from private competition. They, however, do not adjust any profits made from their refining business to offset the revenue loss from selling fuel at government-set prices.
Besides, the losses from selling fuel at regulated price is only the gap between the retail price in the country and the price one would have to give if fuel is imported (including taxes.) It has nothing to do with the cost of production.
The companies asserted that it is only after the assistance of Rs 83,500 crore from the government and Rs 55,000 crore from upstream oil companies ONGC, OIL and GAIL, totalling Rs1,38,500 crore, that they could declare nominal profits. “Had this assistance not been given, the three OMCs would have reported a combined loss of Rs1,32,000 crore,” the companies said. They added that their combined borrowings have gone up from Rs97,000 crore in March 2011 to Rs1,28,000 crore in March 2012. Besides, their interest burden has gone up from Rs 4,700 crore in 2010-11 to Rs 9,500 crore in 2011-12, the companies said.
FUEL FIGHT
* Top executives of three state-owned oil firms say they made huge losses of R15,100 cr in Apr-Dec 2011
* Vayalar Ravi had stated IOC made a profit of R12,670 cr and BPCL R3,962 cr in January-March quarter
* Oilcos do not adjust profits from refining against loss from selling fuel at regulated prices
* OMCs say they would have reported R1,32,000-cr loss without govt assistance
DIESEL, LPG HIKE MUST: PM’S ADVISER C RANGARAJAN
NEW DELHI: The Indian economy faces “a critical situation” and the government must raise the prices of diesel and cooking gas and move forward on economic reforms to revive growth, chairman of the Prime Minister’s Economic Advisory Council C Rangarajan has said.
In an interview to a TV channel, Rangarajan said reforms needed to be pushed and there was a need to take action in various fields such as banking, insurance, pension and get the consent of the people for these reforms. “Yes, I think we face a critical situation,” he said when asked whether the economy faced a “serious problem”.
The Indian economy,Asia’s third-largest, has slowed in recent quarters hit by high interest rates, stubborn inflation, weak global economy, lack of economic reforms and policy delays. A slew of scandals that hit the headlines in the past one year have dented the coalition’s appetite to announce big bang reforms.
Latest data shows growth slowed to 5.3% in January-March, the slowest pace in nine years, while overall growth in 2011-12 eased to 6.5% compared with 8.4% in the previous year-ago period.
The government is faced with a large fiscal deficit and economists say it would be a difficult task to meet the 5.1% of GDP target amid mounting subsidies. “I think there is a need to raise the prices because the fiscal deficit can be contained only if we act on cutting subsidies and the most important element in subsidies is the petroleum subsidy,” Rangarajan said. “Therefore, I would say there is a need for action with respect to the prices of diesel and LPG (liquefied petroleum gas),” he added.
Last month, the state-run oil marketing firms had raised petrol price by Rs 7.50 per litre but the move was met with howls of protest forcing the government to announce a partial rollback. Some allies of the government and opposition parties have demanded a complete rollback.
“Yes I think it should be done as early as possible,” Rangarajan said when asked whether diesel and cooking gas prices should be raised. “I would urge action be taken in these two fields. But I must also mention that there are different ways of doing it. There are ways in which the low income groups are not affected,” he added.
“The methodology and modes of doing it will have to be thought through. But action is required,” he said.
He said there was a need to move in the direction of cutting subsidies and maintaining it as a certain proportion with the GDP as that was the only element in total government expenditure where there was some flexibility. “This is very clear that there is a certain amount of resentment and there is some unhappiness about raising prices of petroleum products and cutting the subsidies on others,” Rangarajan said.
“But the kind of situation we are placed in and where there is a compulsion to keep the fiscal deficit down, we need to take action and therefore, however, unpleasant it may be,” the PM’s key economic advisor said.
The former Reserve Bank ofIndiagovernor and noted economist said allowing FDI in multi-brand retail was welcome but there should be consensus to do it. “I think we should take action to get that done but there is also a need to get some degree of consensus on it. We need to build it, but we must take early action in this areas. Also, build the consensus and do it,” Rangarajan said.
The government had to postpone its move to open up the multi-brand retail sector to foreign firms after stiff opposition from some of its allies and other political parties. The government has said it is trying to evolve consensus before rolling out the keenly awaited reform but so far the progress has been slow.
Rangarajan also said the estimate of 7.6% GDP growth for the current fiscal year which ends in March looked a bit ambitious but it was possible to reach 7% growth in 2012-13.
OIL COMPANIES’ CLAIMS OF LOSSES SEEM UNTRUE: VAYALAR RAVI
NEW DELHI: Close on the heels of public criticism by the Defence Minister, Mr A.K Antony, the Overseas Affairs Minister, Mr Vayalar Ravi, has also come out against petrol price hike.
The veteran Congressman from Kerala has written a letter to the Petroleum Minister, Mr Jaipal Reddy, seeking “closer scrutiny” of the issue. He said the claims made by oil companies that they are running in loss seem false.
Quoting media reports, he said in the letter that Indian Oil Corporation made a profit of Rs 12,670 crore in the January-March quarter. BPCL also announced a net profit of Rs 3,962 in the same period.
“Apparently the claims made by the oil companies that they are running at a loss, seem to be untrue. As a matter of fact, the expenditure of oil companies, including salaries, is among the highest inIndiaand there is a perception that funds are being wasted,” Mr Ravi said in the letter.
Though the oil companies announced a cut of Rs 2 per litre on Saturday, the UPA ally, the Trinamool Congress and the Opposition parties were still not ready to call back their protests.
The West Bengal Chief Minister, Ms Mamata Banerjee, demanded a complete roll-back.
“I am not happy at the cut in petrol price by Rs 2 a litre. It is not enough. It is still a burden on the common man. There should have been a total roll-back of the hike,” she told reporters in Kolkata.
BJP spokesperson, Mr Rajiv Pratap Rudy, also pressed for a “total roll-back” and wondered whether the hike of Rs 6/litre after the partial roll-back was “acceptable” to the UPA allies.
A CPI(M) statement said “This is unacceptable because the increase in the price of petrol is still Rs 5.54/litre.”
ENVIRON MINISTRY CLEARS GROUND FOR ONGC TRIPURA’S POWER EVACUATION FACILITY
KOLKATA: The Union Ministry of Environment and Forests (MoEF) has cleared the ground for creating the power evacuation facility of the upcoming 727 MW ONGC Tripura Power (OTPC) at Palatana in Tripura.
The Rs 1,800-crore transmission project – connecting the generation facility to the National grid 661 km away at Bongaigaon inAssam- is running far behindschedule.
The first 363.3 MW unit of Rs 3,500-crore gas-based generation facility is expected to be operational in a fortnight.
The second (and final) unit may be commissioned in three months. Considering the low demand for power in the North-Eastern region; the transmission line holds the key to commercial success of OTPC and monetisation of idle gas assets of ONGC in Tripura.
“The Ministry has recently granted final clearance for laying the transmission facility through the states of Tripura, Meghalaya andAssam,” an OTPC source told Business Line. The transmission project is implemented by North-East Power Transmission Company — a joint venture between OTPC, Power Grid and the beneficiary States.
Though the Centre has granted a go-ahead; sources fear that commissioning of the first phase of the transmission facility from Palatana to Silchar covering 246 km may be affected due to the early arrival of monsoon.
“Of a total of 600 towers to be installed on the stretch, only 13 were struck in forest logjam. Most of such locations are up the hill and equipment needs to be carried in head-loads. Rains made the job difficult,” a source said.
With generation from the first unit expected to stabilise in July-August, the company is hopeful of completing the phase-I work in time.
Trouble, however, is likely once OTPC commissions the second 363 MW unit expectedly in September, as the 415 km Sinchar-Bongaigaon section which will cross Brahmaputra – one of the major rivers inAsia– is inordinately delayed.
The company, therefore, is banking on completion of the 122-km Silchar (Asam)-Byrnihat (Meghalaya) stretch of the transmission project, to tap more local demand by the end of the year.
BPCL TO GIVE MAJORITY STAKE TO UK COMPANY IN PETCHEM JV
MUMBAI: State-run Bharat Petroleum Corporation Limited (BPCL) has finalised a joint venture (JV) agreement with UK-based LP Chemicals for petrochemical business. BPCL is likely to hold 49 per cent in the venture, with the British company holding a majority 51 per cent.
The JV would invest about Rs 5,000 crore in the project and have a 70:30 debt equity ratio. LP Chemicals may bring in Rs 1,500 crore. BPCL plans to spend Rs 40,000 crore in the next five years to set up a petrochemical plant at theKochirefinery to produce niche products, expand the capacity of existing refineries, gas marketing and exploration and production.
“We will sign the memorandum of association shortly. After this, we will have to do a feasibility report and later a company will be formed. We should be able to put things in place by early next year,” said a senior BPCL executive, on condition of anonymity.
The executive said the company would integrate the expansion of itsKochirefinery and construction of its petchem plant. The deadline for both projects has been set for 2015. The country’s second-biggest state-run refiner would expand theKochirefinery by 63 per cent to process cheaper, high-sulphur crude to improve margins and products.
In March, it had said it would invest Rs 14,225 crore in the expansion and upgradation project, which would see the refinery processing 310,000 barrels per day (bpd), clearance for the project is expected in the latter half of 2012.
It had also said it plans to produce polymer-grade propylene from the project which would be used as a feedstock for a series of niche petrochemicals.
The executive said the company was looking at producing 500,000 tonnes of propylene derivatives yearly, which are imported at present. “Our partner is a licensor of the speciality chemical that we are planning to produce,” he added. BPCL is engaged in talks with the Kerala government for concession on the investment in the planned petrochemical unit, the official added.
LP Chemicals, headquartered in Winsford offCheshire, manufactures and distributes laboratory chemicals and veterinary chemicals to customer specification.
IGL GETS BOOST FROM FAVOURABLE HC RULING
MUMBAI: A Delhi High Court order on Friday, stating that the Petroleum and Natural Gas Regulatory Board (PNGRB) does not have the power to fix gas rates, gave a big relief to city gas distribution company Indraprastha Gas Ltd (IGL).
Following the favourable ruling, IGL shares surged 28.7 per cent, or Rs 55.60, to close at Rs 249.35 on Friday.
The order ends two months of uncertainty over the company’s profitability and prospects. On April 9, the oil and gas regulator had announced a cut in network and compression charges by 63 per cent and 59 per cent to Rs 38.58 per million British thermal units (mBtu) and Rs 2.75 per kg, respectively, for the National Capital Region (NCR) where IGL enjoys a monopoly. Additionally, it was asked to refund the excess charges worth about Rs 900-1,100 crore, on a retrospective basis (effective April 2008).
Consequent to this order, analysts had then estimated IGL’s profit to fall up to 75 per cent in the current financial year, besides setting it back by over Rs 1,000 crore on account of refund of past charges. Following the order, the stock fell a sharp 33.67 per cent on April 10 to Rs 229.80, from Rs 346.40 previously. Since then, it kept sliding and closed near its 30-month low of Rs 193.75 on Thursday.
The regulator’s move was also significant as it affected the key margin lever at IGL’s disposal — its pricing power. Driven by rising liquified natural gas prices, IGL had initiated six price rises, enabling it to post an Ebitda margin of 25 per cent in FY12.
PNGRB’s April 9 order had led HSBC analysts to halve their FY13 Ebitda margin estimate for IGL to 13 per cent. Analysts at SBI Cap Securities, too, had then estimated a 59 per cent fall in IGL’s FY13 Ebitda. In their report dated April 10, HSBC analysts were estimating the net profit to tank 71.3 per cent in FY13 to Rs 88 crore, as compared to Rs 306 crore this year.
Analysts tracking the company said among the few levers IGL was left with, was that it was free to fix marketing margins (unregulated currently). However, many believed it would have only partially compensated for the potential loss due to cut in network and compression rates. Implementation of these lower rates would have also crunched the return ratios and growth plans of the firm.
Friday’s order has brought some cheer, though analysts await further clarity. Deepak Pareek, analyst at Prabhudas Lilladher, said, “This is certainly a positive development for IGL. We keep the stock under review and await clarity on the course of action by PNGRB and the IGL management.”
While the Delhi HC decision is welcome, PNGRB still has the option of approaching Supreme Court. Even after Friday’s surge, the stock is still down 28 per cent from Rs 346 witnessed on April 9.
Following the SC ruling, counters of other companies in the sector galloped on Friday. Shares of Gujarat Gas Company gained 14.62 per cent to close at Rs 333.55 and Gujarat State Petronet climbed 11.2 per cent to Rs 70.50.
OMCs DISMISS FALSE IMPRESSION OF HUGE PROFITS
NEW DELHI: Dismissing “false impression” of having made huge profits, chief executives of the three state-owned oil companies today said a combined bailout package totalling a whopping Rs 1,38,500 crore had helped them report nominal profits in 2011-12 financial year.
In an unusual joint statement, Indian Oil Chairman R S Butola, Bharat Petroleum chief R K Singh and Hindustan Petroleum CMD Subir Roy Chowdhury said contrary to the false impression of oil marketing companies (OMCs) making huge profits in 2011-12, the oil firms had “incurred huge losses of Rs 15,100 crore in the first nine months (April-December 2011)”.
The statement came in response to a letter by Overseas Indian Affairs Minister Vayalar Ravi to Oil Minister S Jaipal Reddy saying the claim made by oil companies that they are running in loss seems to be untrue in view of the profits they reported in fourth quarter ended March 31.Raviin the letter said IOC made a profit of Rs 12,670 crore in January-March quarter and BPCL Rs 3,962 crore.
It, however, said the three oil firms had reported a net loss of over Rs 15,100 crore in first three quarters which was being ignored in making such statements. “The companies incurred losses due to sale of three products, namely diesel, domestic cooking gas LPG and PDS kerosene at highly subsidised prices,” it said.
“It is only after the assistance (subsidy) of Rs 83,500 crore from the government and Rs 55,000 crore (grant) from the upstream oil companies (ONGC, OIL and GAIL), totalling Rs 1,38,500 crore, the three public sector OMCs could declare nominal profits,” it said. Had this assistance not been given, the three OMCs would have reported a combined loss of Rs 1,32,000 crore, it said.
GUJARAT STATE PETROLEUM CORP LOWERS BID FOR GUJARAT GAS COMPANY STAKE
AHMEDABAD: BG is facing aggressive bargaining in the sale of 65% stake in its city gas venture, with the sole bidder, Gujarat State Petroleum Corp (GSPC), offering to pay less than its original bid, and the rupee’s depreciation squeezing the returns further for the global energy firm.
The currency’s fall, from about 43 against the dollar last year to about 56, has also hit valuation of the stake as BG’s unit, Gujarat Gas Company (GGCL), depends on import of liquefied natural gas ( LNG) as domestic gas is scarce.
According to industry sources, GSPC had earlier offered to pay 300 per equity share of GGCL. “With depreciating Indian rupee, imported LNG-dependent city gas distribution (CGD) companies are no more attractive for investors. GSPC is bargaining hard and is willing to pay only 250-260 per GGCL equity share to BG Group,” said a government ofGujaratofficial.
GGCL stock had plunged to a 52-week low of 270 on April 13 from an all-time high of 463 in September 2011. The recent order from the gas regulator on tariff of Indraprastha Gas inDelhihad hurt investor sentiments. But the subsequent court order that favoured gas firms helped GCCL’s stock rise 14.6% to 333.55 on Friday, lifting the firm’s value to 4,277 crore.
TheGujaratgovernment official said GSPC had the upper hand in negotiations as other bidders like Adani and Torrent groups withdrew from the race to acquire the country’s largest CGD player in the private sector for undisclosed reasons. According to the official,Gujaratgovernment is keen to regain control over GGCL, which it sold to BG Group a few years back. GGCL also holds a minor equity stake in GSPC.
“The city-gas sector has seen some adverse regulatory interventions. The lack of domestic gas is posing to be a huge deterrent. So we have hired SBI caps to do a revised valuation and are hoping to close the deal by June-end,” a person involved in the negotiations said. Meanwhile, GGCL MD Shaleen Sharma will move to BG India headquarters in Mumbai as deputy country head. GGCL CFO Sugata Sircar will replace Sharma from July.
Indian Oil, Bharat Petroleum, Hindustan Petroleum dismiss ‘false impression’ of huge profits
NEW DELHI: Dismissing “false impression” of having made huge profits, Chief Executives of the three state-owned oil firms today said a combined bailout package totalling a whopping Rs 1,38,500 crore had helped them report nominal profits in 2011-12 fiscal.
In an unusual joint statement, Indian Oil Chairman R S Butola, Bharat Petroleum Chief R K Singh and Hindustan Petroleum CMD Subir Roy Chowdhry said contrary to the false impression of oil marketing companies (OMCs) making huge profits in 2011-12, the oil firms had “incurred huge losses of Rs 15,100 crore in the first nine months (Apr-Dec 2011)”.
The statement came in response to a letter by Overseas Indian Affairs Minister Vayalar Ravi to Oil Minister S Jaipal Reddy saying the claim made by oil companies that they are running in loss seems to be untrue in view of the profits they reported in fourth quarter ended March 31.Raviin the letter stated that IOC made a profit of Rs 12,670 crore in January-March quarter and BPCL Rs 3,962 crore.
It, however, said the three oil firms had reported a net loss of over Rs 15,100 crore in first three quarters which was being ignored in making such statements.
“The companies incurred losses due to sale of three products, namely diesel, domestic cooking gas LPG and PDS kerosene at highly subsidised prices,” the statement said.
“It is only after the assistance (subsidy) of Rs 83,500 crore from the government and Rs 55,000 crore (grant) from the upstream oil companies ( ONGC, OIL and GAIL), totalling Rs 1,38,500 crore, the three public sector OMCs could declare nominal profits,” it said.
Had this assistance not been given, the three OMCs would have reported a combined loss of Rs 1,32,000 crore, it said.
RIL RELENTS, TO SIGN GAS SUPPLY PACTS WITH PRAGATI POWER, NTPC
NEW DELHI: After initially resisting, Reliance Industries Ltd (RIL) has agreed to sign agreements with Pragati Power Corp and NTPC for supply of natural gas from its eastern offshore KG-D6 fields.
With output from KG-D6 continuing to decline, RIL was against signing new Gas Sale and Purchase Agreements (GSPA) as meeting new supply commitments would have meant cutting gas supplies to existing power plants.
But under intense pressure fromDelhigovernment and oil ministry, RIL has now agreed to sign GSPAs for supply of 2.16 million standard cubic meters per day toDelhi’s Bawana power project and NTPC, industry sources said.
RIL has informed theDelhigovernment and Pragati Power Corp of its intention to sign GSPA for supply of 0.93 mmsmcd of gas and has forwarded a draft agreement.
KG-D6 fields had seen drop from 61.5 mmscmd in March, 2010, to about 32 mmscmd, forcing pro-rata cuts on customers.
Sources said the new pacts would mean supplies to 25 power plants who were allocated gas from Krishna Godavari basin fields, further going down.
Private power producer Lanco has already warned of power plants, which are currently operating at less than 38 per cent, shutting down if supplies are cut any further.
Supplying gas to Bawana and NTPC would mean supplies would further reduce to uneconomical levels of 20-25 per cent.
While the KG-D6 gas supplies dropped, the pro-rata cut was applied only to the 25 power plants which had an original allocation of 28.90 mmcmd. Fertiliser plants, which were allocated about 15 mmscmd of KG-D6 gas, did not face such a cut.
Supplies to Pragati Power would mean a further drop in supplies to power plants, sources added.
OVER THE BARREL: THE POLITICAL ECONOMY OF PETROLEUM PRICES
What is to be done? How can we untie the Gordian knot that has so entangled the political economy of petroleum product prices? This is the question that now exercises our most experienced politicians and our ablest economists.
Most well informed people know that a country that imports 80% of its oil requirements cannot de-link itself from the international market; and that if it did the supplies would eventually dry up; industry would sputter to a slowdown and the macro-economy would hit the skids. But what they do not know is how to keep this linkage and at the same time reconcile the different and often conflicting demands of the multiple stakeholders impacted by it. Politicians, for instance, want to be elected and are unconcerned about the economic logic. They want the oil companies to shield their electorate from high prices. The government wants to contain the fiscal deficit and to create a pricing mechanism that minimises the subsidy outgo. The oil companies want the autonomy to run their business on commercial principles and the consumers want security of supply, quality, access and low prices. These demands are varied and it is not easy therefore to get the stakeholders onto the same page.
So “what is to be done”. How can the demands of these interest groups be made to converge onto a point of equilibrium. Several eminent public servants, such as Vijay Kelkar, C. Rangarajan, B.K. Chaturvedi and Kirit Parekh have provided a catalogue of sensible suggestions that flow from “good economics” but do not ignore “good politics”. They have recommended that the price of diesel and petrol should be aligned to the international market but also that the low-income consumers should continue to receive subsidies. These subsidies should not be channelled through the oil companies but transferred directly from the budget. They have accepted that subsidised LPG should not be totally withdrawn because of politics, but they have suggested that an upper limit be placed on the number of cylinders that can be purchased at concessional rates. They have urged the government to unshackle the oil companies from the bureaucracy and to allow the management operational autonomy. They have argued for a simplified customs and tax duty structure and the inclusion of petroleum products within the ambit of GST. These recommendations are notable for their pragmatism; notwithstanding they have not passed political muster. The reports containing the recommendations are gathering dust in various government offices.
Paradoxically, the cynics have taken the rejection of these reports to suggest an alternative answer. “Let the situation spiral out of control and use the opportunity created by the ensuing crisis to reform the system.” It is their view that an “oil supply” crisis could provide the trigger for catalysing a radical overhaul. They may well be right. The severity of the recent petrol price hike is in part because there was no alternative. The oil companies were looking into a cash abyss. The point however that should not be forgotten is that change induced through crisis can be extremely painful. We all remember and applaud the reforms of 1991. But we forget that these reforms were preceded by years of inflation, unemployment, foreign exchange restrictions and general economic hardship. The government was compelled to reform because of the consequences of bad policy that caused great unhappiness. Crisis should never be sought as the point of departure for policy change. But if and when it strikes, the opportunity to reinvigorate and recreate should not be foregone.
So is it that the answer to the above question distils down to essentially two policy options. One generated by the experts after careful thought and the other compelled through financial and economic mismanagement. I do not think so. I think conceptually there is a third middle-of-the-road answer.
A stumbling block to change is the tendency to overlook what is good in the hope of securing the perfect. A first step is often not taken until and unless the aspired destination is in sight. This hesitancy can be counter-productive. It perpetuates the status quo and dilutes the significance of incrementalism. A small initial step can often lead to a larger next step and thereon. It is not necessary that only policies that swing the needle 360 degrees should be pursued. Less ambitious initiatives that move it say 5 degrees should also be considered. Such initiatives can trigger movements that eventually push it full circle. The mistake that we might be making today regarding petroleum deregulation is that suggestions to initiate incremental albeit imperfect small steps are being stalled because they are imperfect and small. The idea of dual pricing for the two grades of diesel has for instance been blocked because of the concern that it will lead to black marketing, smuggling and diversions. These are valid concerns. Dual pricing is complex to administer and it is distortionary. But relative to current conditions the proposal should be considered. At a minimum it should be studied whether in view of the severity of the subsidy burden and the consequent imperative to deregulate diesel prices, the cost of continued inaction might not be greater than the cost of taking a small albeit “imperfect” first step. Especially if by doing so the ground work for a larger second step is laid.
The Gordian knot will not be easily or quickly untied. There are too many fingers involved and not all are working to loosen it. It has to however be untangled. The issue is how. The economists have chalked out one route. The balance of power between the stakeholders is however such that this has not been preferred. The other alternatives are operationally imperfect. They have therefore not been considered. Should they be? It is not obvious that they should but it should be acknowledged that the desired outcome can sometimes be reached through a sequence of “imperfect” small initiatives.
The author is Chairman of the Shell Group inIndia. Views are personal
THE DIESEL DILEMMA
Retail prices of diesel have to be hiked by Rs 15.35 per litre if oil refiners are to break even on sales of the fuel. However, the government is more likely to go for a moderate increase that will strike a balance between risking the ire of consumers and reducing its subsidy, feel experts.
In 2011-12, diesel accounted for around 59 per cent of the total under-recoveries of Rs 1.38 lakh crore incurred by public sector oil marketing companies on subsidised fuels.
At the current level of prices, the OMCs subsidy burden on diesel is projected at around Rs 1.09 lakh crore, which is 57 per cent of the estimated under-recoveries of Rs 1,89,605 crore in 2012-13.
The government shouldered approximately 60 per cent of this cost in 2011-12 by doling out subsidies, amounting to Rs 83,500 crore to the oil companies for the year.
However, this is clearly not a sustainable exercise: the fiscal deficit for 2011-12 is expected to have grown to 5.6-6 per cent, against the target of 4 per cent for the year. On the other hand, the government will have to factor in that diesel prices have a cascading effect of inflation.
The fuel has a weight of 4.67 in the wholesale price index (WPI), which is the highest among the 670 commodities of the WPI.
For each rupee increase in diesel price, the WPI index is estimated to increase by 0.13 per cent. While deciding to revise the diesel prices, the government has to take into account the interest of domestic consumers and protect the economy from the cascading inflationary impact of high international oil prices.
Another point of consideration for the government will be the growing price gap between petrol and diesel. With more frequent revisions of the retail selling price of petrol, the gap between prices of the more environment-friendly fuel and polluting diesel has widened to Rs 32.27 per litre inDelhi.
This is encouraging higher consumption of diesel, not only by transport vehicles, but industry.
The gap between the RSP of furnace oil (Rs 58.65 per litre) and diesel (Rs 40.91 per litre) has made many industries opt for the cheaper fuel, though they are clearly not the targeted beneficiaries of the heavy subsidy.
The growth in diesel consumption during 2011-12 was 7.8 per cent, higher than the rate of 6.7 per cent registered in 2010-11. On the contrary, growth in consumption of petrol has declined from 10.7 per cent in 2010-11 to 5.7 per cent in 2011-12.
OIL PLUNGES TO 8-MONTH LOW ON WEAK US JOBS REPORT
SINGAPORE: Oil plunged to fresh eight-month lows near $82 a barrel Monday in Asia as a dismal US jobs report sparked selling of stocks and commodities.
Benchmark oil for July delivery was down $1.09 to $82.14 per barrel, the lowest since October, in electronic trading on the New York Mercantile Exchange. The contract fell $3.30 to settle at $83.23 inNew Yorkon Friday.
InLondon, Brent crude for July delivery was down $1.07 at $97.36 per barrel on the ICE Futures exchange.
The Labor Department said Friday that employers in theUSadded just 69,000 jobs in May, the fewest in a year and well below what economists expected. The unemployment rate rose for the first time since last June, up to 8.2 per cent from 8.1 per cent.
“Friday’s employment report was so mind-numbingly bad,” energy trader and consultant The Schork Group said in a report.
It was the third month in a row of disappointingUSjob growth, suggesting the economy is slowing and oil demand will likely grow less than expected this year.
Crude has plummeted 23 per cent in the last month amid signs of weak global economic growth. As Europe struggles to contain its debt crisis, signs of sputtering Chinese growth have coupled with a falteringUSrecovery to undermine investor confidence.
Oil traders often look to global stock markets as a barometer of overall investor sentiment, and Asian equities were sharply lower Monday after the Dow Jones industrial average dropped 2.2 per cent Friday.
In other energy trading, heating oil was down 1.4 cents at $2.61 per gallon while gasoline futures fell 2.2 cents at $2.63 per gallon. Natural gas gained 1.6 cents at $2.34 per 1,000 cubic feet.